Science 37 Holdings Inc (SNCE) 2023 Q1 法說會逐字稿

Greetings, and welcome to the Science 37 first quarter 2023 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Halper, LifeSci Advisors. Thank you, sir. You may begin.

Thank you, operator, and thank you all for participating in today's call. Joining me are David Coman, Chief Executive Officer; and Mike Zaranek, Chief Financial Officer. Earlier today, Science 37 released financial results for the quarter ended March 31, 2023. A copy of the press release is available on the company's website.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal security laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based upon our current estimates of various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.

We encourage you to review our filings made with the Securities and Exchange Commission for a discussion of these risk factors, including in the Risk Factors section of the company's most recently filed periodic reports on Form 10-K and Form 10-Q and subsequent filings.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today and the company disclaims any obligation to update such statements for new information.

We believe that certain non-GAAP metrics are useful in evaluating our operational performance. We use these non-GAAP measures to evaluate our ongoing operations and for internal planning and forecasting purposes.

Information about non-GAAP financial measures referenced, including a reconciliation of those measures to the most comparable GAAP measures can be found in our SEC filings and earnings materials available on the Investor Relations portion of our website at investors.science37.com.

I would now like to turn the call over to David Coman. David?

Thank you, Steve, and thanks, everyone, for joining us for our first quarter 2023 earnings call. First quarter revenue was $14.1 million and adjusted EBITDA loss was $12.4 million, both of which were better than expected. More than 80% of our first quarter back -- or bookings, rather, came from repeat customers, including four projects worth more than $3 million each.

First quarter gross bookings totaled $23.6 million and net bookings were just under $12 million. As referenced in our business update last month, approximately two-thirds of our realization adjustments was from the cancellation of a single study that was previously placed on hold and was not included in our original phased backlog assumption for this year.

The cancellation has no impact on our previously stated 2023 revenue guidance. Today, we are confirming our 2023 revenue guidance of $55 million to $60 million. Despite the continued challenging macro-economic conditions, we're pleased to see some progress in our pipeline now that Michael Shipton our new Chief Commercial Officer has had two full quarters under his belt.

Quarter over quarter RFP volume, dollar volume is up approximately 25% at the end of the first quarter, and it includes a number of exciting new opportunities from our top 20 pharma, CRO, and real-world evidence channels where Michael has placed specific emphasis.

In the past few weeks, we announced a couple exciting new additions to our team, including Erica Prowisor and Irena Lambridis who are leading our patient recruitment and quality efforts respectively, and have really hit the ground running. These are two important strategic additions for us. Recruiting patients faster is expected to drive new business growth and should accelerate the conversion of our backlog.

Quality is equally important, particularly for repeat business, and as we execute on our centers of excellence or COE strategy, we introduced on the business update call last month. Our COE strategy is going very well, and is fully on track. We noted that this strategy will help us focus attention and resources to our unique Metasite offering while driving costs out of the business.

As a result of this strategy and our continued commitment to cost containment, we are updating our 2023 guidance for adjusted EBITDA loss to be in the range of $41 million to $39 million, which represents a nearly 20% improvement in the EBITDA compared to our previous guidance provided last quarter.

As we noted in our business update call that the creation of our COEs has been made possible by the great work being conducted by Troy Bryenton, our Chief Technology Officer who joined us last fall. He's brought on some incredible talent, including our Head of Technology Operations, Christiaan Buitendach; our Head of Architecture and Interoperability, Paul Kalin; and the newest member of our technology team, Jeff Richardson who now heads Data and Analytics.

These new hires came to us with significant leadership experience from companies that include Thermo Fisher, IQVIA, Syneos, and Javara, and ample background in effectively managing near and offshore teams as well as integrating new technology.

Speaking of new technology integrations, we're very pleased with the addition of the vault assets that we acquired earlier this year. The integration of the vault scheduling capabilities, the team, and additional workflows are expected to lead to material efficiencies in our delivery model going forward.

In summary, putting a tough year behind us, we're coming into 2023 with solid results and renewed optimism in our ability to accelerate topline growth once again. We have made some transformative changes to our infrastructure that are already producing a significant impact on our cost structure. These changes give us confidence that we will reach our goal of adjusted EBITDA positive by the end of 2024 without having to raise additional capital, and with ample cash on hand.

Now before turning it over to Mike for the financial highlights from the quarter, I wanted to call your attention to the recent draft guidance issued by the FDA regarding the use of decentralized clinical trials for drugs, biological products, and devices.

Overall, we believe the draft guidance makes great strides to codify areas of operational ambiguity, and reinforces our approach to executing faster, and more inclusive, patient friendly clinical research with our standard operating procedures as best practice.

It should give great comfort to sponsors going forward that the Science 37 Metasite fully complies with the FDA regulations for drug development. Their draft guidance reinforces the benefits of DCT in regards to recruitment, retention, and patient centricity.

It doubles down on FDA's commitment to diversity and endorses the model as a means through which to deliver more diversity in clinical research. Of course, we'll have to wait for the full final guidance, but we believe even this draft guidance is a big win for Science 37, our sponsors, and for patients everywhere.

With that, I will now turn the call over to Mike Zaranek, our Chief Financial Officer, to provide additional details.

Thank you, David, and good morning, everyone. I will discuss the first quarter results for the period ended March 31, 2023, and then we'll affirm our outlook for full year 2023. In the first quarter, we reported revenues of $14.1 million, which was ahead of our expectations. It represents a 25% decrease from the same period last year.

However, excluding COVID and COVID related mitigation work, our year over year revenues increased 28%, which is a testament to the underlying growth of the business. We finished the first quarter with $23.6 million of gross bookings, $11.7 million of net bookings.

As we discussed on the business update call in mid-April, approximately two-thirds of the $12 million in realization adjustments relate to a single investigational program from 2018 for which the sponsor had previously directed multiple starts and stops over the last four plus years.

The program was on pause when we prepared our 2023 guidance. So this program was not included in our 2023 phase backlog or revenue guidance. The customer ultimately terminated the program in the first quarter of 2023, at which point we completely removed it from the total backlog consistent with historical practice.

We exited the first quarter with the combined phase backlog plus realized year to date revenue of $52.3 million for 2023 and $170.5 million in total backlog. COVID related projects represent only approximately 10% of the total backlog. Adjusted gross margin was 22.9% for the first quarter compared to 17.2% for the same period last year.

Adjusted gross profit in the first quarter was $3.2 million, effectively flat as compared to the same period in the prior year. Selling, general, and administrative expenses, excluding $5.1 million of stock-based compensation and depreciation were $15.6 million in first quarter. This was down approximately 32% compared to the same period last year.

Adjusted EBITDA, which we calculate by adding back depreciation, amortization, taxes, interest, other income, stock-based comp, and other non-cash charges was a loss of $12.4 million in the quarter, representing a $7.5 million or 37% improvement from the first quarter of 2022.

Consistent with the factors we cited on the fourth quarter earnings call, US GAAP required us to record a non-cash impairment of $7.8 million related to our long-lived assets in the first quarter. Amongst other things, this was a result of our market capitalization which was less than the cash and book value for a sustained period. This is an accounting assessment and does not necessarily reflect our view of the longer-term potential of our platform.

US GAAP net loss was $16.8 million versus GAAP net income of $44.9 million in the first quarter a year ago, which if you recall included a $75.5 million positive non-cash reversal in fair value of the earnout liability. The adjusted net loss for the first quarter was $12.6 million, which compared to an adjusted net loss of $23.3 million in the same period last year.

Now turning to cash. We ended the quarter with $82.6 million in cash and cash equivalents. In the first quarter, our cash burn was approximately $25 million, which included onetime cost and seasonal cost, including our annual cash bonus payout, the purchase of the health platform, and cash payments related to previously announced restructuring actions. Cash burn, excluding these items, was in line with the fourth quarter at approximately $20 million.

As we noted in our SEC filings on April 28, we completed a tender offer for certain outstanding options. The company exchanged approximately $10.6 million out of money options for $4.7 million restricted stock units that vest over a three year period as of the grant date.

As the company was in a loss position, these exchange options had previously been anti-dilutive, and had no impact on our share count for the calculation of dilutive earnings per share during the first quarter. Future quarters will include outstanding restricted stock units as the dilutive component to our earnings per share.

We also wanted to provide an update on the notification we received from Nasdaq in late December relating to our stock trading below $1 per share. As you may have seen in our 8-K that we filed at the end of December 2022, we have until June 26, 2023, to become compliant with the Nasdaq continued listing requirements.

If the compliance requirements are not met prior to the June 26 deadline, we intend to seek a 180-day extension which would push the deadline to regain compliance to late December 2023 at which point we were afforded several options, which we will consider if necessary.

Now let's turn to the outlook for 2023. This morning, we are reconfirming the 2023 revenue guidance of $55 million to $60 million. First quarter gross bookings and revenues were consistent or slightly above our expectations, and we continue to have strong visibility into our phase backlog.

We expect the introduction of our centers of excellence or COEs and the corresponding restructuring that we announced previously to have a positive effect on our profitability this year. As a reminder from our business update call in April, we noted that these changes would provide an additional $8 million to $10 million of savings in 2023 relative to our original adjusted EBITDA guidance of negative $48 million to negative $50 million that we announced on our fourth quarter earnings call.

These incremental savings are reflected in our latest guidance for 2023 adjusted EBITDA loss in the range of $39 million to $41 million. Given that these actions occurred partway through the second quarter in terms of the restructuring, we expect to realize a partial benefit of the planned savings in the second quarter and then a full benefit from the savings in both the third and fourth quarters respectively.

Finally, we wanted to provide some additional color on our path to profitability by the end of 2024. We remain highly optimistic about our bookings and revenue growth as evidenced by the improvements to our RFP flow.

The recent investments in our patient recruitment function are expected to yield more predictable conversion of backlog into revenue, and we have taken action to ensure we execute with industry-leading quality while we increase profitability and dramatically reduce cash burn.

To provide a finer point, we see a clear, albeit partial impact of the recent cost restructurings in second quarter. Over the course of the year, we expect the full impact on the quarterly adjusted gross margins to improve from the low 20% range in the first quarter to low to mid 30% range in the second half.

Additionally, we expect to see a sequential reduction in SG&A and a more dramatic reduction to cash burn exiting the fourth quarter 2023 with a cash burn rate of less than $10 million. As we progress into 2024, we expect the technology investments we are making this year will help us expand quarterly gross margins to 40% plus, delivering higher gross profit on a relatively fixed level of SG&A and ending Q4 2024 EBITDA positive without raising additional capital, having ample cash on hand, and no debt.

In summary, we are encouraged by our first quarter 2023 gross bookings and cost structure initiatives. Going forward, we are optimistic about the efficiencies of our cost center of excellence model that will provide our company and customers as we march down the path to profitability.

At this point, I'd like to turn the call back over to David for closing comments.

Thank you, Mike. Between improving commercial traction, enhancements made to our patient recruitment quality and technology leadership, and the recent restructuring to improve our margins and cash position, our competence grew this quarter.

We're highly focused on protecting our cash runway for the benefit of our patients, sponsors, and shareholders. We do not view this as optional. We expect to come out of this period of transition as a much stronger company that is well positioned to profitably scale our business and create value for our key stakeholders.

With that, we'll will now open it up for questions and turn it back over to the operator.

(Operator Instructions) Charles Rhyee, TD Cowen.

Thanks for taking the questions guys. David, just want to talk a little bit about what you're seeing now in terms of the markets, obviously with the draft guidance, I think large -- somewhat expected. Maybe talk a little bit about the character of the discussions you're starting to have right now. Whether this has increased the volume of inquiries into science?

And then secondly, if you could just remind us how you guys differentiate yourselves from -- obviously there's other players in the space, both small and certainly some of the larger CROs, some of them who claim to have very extensive PCP capabilities as well. Maybe if you could just remind us how you see yourselves positioned in the market and maybe a little bit more on the pipeline.

Sure. Thanks for the question, Charles. If you take the overall macro-economic environment, I think that the same themes remain in terms of longer sales cycles, delays in project funding, and general conservatism that we didn't experience back in 2021. But we really plan for that going forward. We've been talking about that for the last several quarters.

We're pleased to start seeing some traction on our FP volume as it relates to the work that Michael Shipton and his team have been doing, particularly focusing on the top 20 pharma, the CRO channel, and RWE channels. I think those have been providing us with some significant traction. So the quality -- I mean, I think the quality business flow is up and our win rates up, and I think that's all very positive.

In regards to the FDA guidance, we look at that as being super favorable for us. Not just us, but for also for sponsors and for patients. It really does codify a lot of the ambiguity that has been out there. As we read through it, we compare that relative to our SOPs that we have in place today.

And it really it reads almost like a Science 37 handbook. So excited about what that means for us as we move forward. The draft guidance just came out. So I think it will take a little bit of time for people to start digesting it, but it certainly should help us in the immediate time just from a win rate perspective.

The second question was in regard to the competitive environment. And I think we still have framed ourselves in a really nice place with the Metasite solution. If you look at what is out there from a competitive standpoint, there are a lot of point solutions out there being advertised as a solution to decentralization. Could be just a nursing solution or combining a nurse solution with a third party technology solution.

But the fact that we have -- they call everything that we do decentralized clinical research, but what we're really doing is centralizing the people, processes, and technology into one place in order to be able to deliver a fully decentralized or decentralized arm of a clinical trial.

I think that puts us in a really nice place from a competitive standpoint. There are a couple of smaller companies that are out there trying to replicate the Science 37 model. I even know of one that came out recently that had something like we're Science 37 -- we're like Science 37 but less expensive or something like that on their website. I mean, I think it's flattery a little bit.

But we've been doing this since 2014, and have gone through the puts and takes, and we're no longer doing trial-and-error. We're actually doing fully decentralized clinical trials on scale, and it's going to take a while for companies to be able to catch up to be able to execute the way that Science 37 can.

What about some of your larger peers? A lot of them have been talking about their GCT capabilities. For larger pharma sponsors -- does that make it a more difficult challenge for you when you're going into -- explain what you do, or do you feel sponsors don't understand the different capabilities of all the players?

Yes. I think as this market matures, that's all better for us. The more that the model gets traction and interest, I think we've continued to be perceived as the leader in the space and a pioneer, and all that I think is helping us in terms of our recent traction.

We are a bit different in that we have everything all in one place. I mean, we're really the only company of scale that has the technology, the processes, the people, all combined into one entity to be able to execute decentralized clinical trials or the Metasite model on scale.

As far as CROs, I know you mentioned that in particular, and we continue to see CROs. CROs is great partners for us. As I noted in the prepared comments, CROs continue to be a really good channel for us. In fact, I think that's an area of traction for us today.

Again, from previous discussions, Michael came from the CRO environment, and has really embraced the CRO partnerships, and they've embraced it back. So it's been a good partnership for us. Thanks.

Max Smock, William Blair.

Good morning. It's Christina on for Max. Thanks for taking our questions. Our first question is around your pipeline. You mentioned RFP is up 20%, but can you give a quantitative update on win rate, and thoughts on bookings for the rest of the year as a percent from new customers versus wins coming from existing customers? Thanks.

Well, we don't provide guidance on bookings, and we haven't historically provided our win rates. I can tell you anecdotally that the win rates have gone up in recent months, and that's a really good sign for traction for us. And I think consistently across all of our channels, we've seen a lot of productivity.

We did give guidance for revenue for the year, and we did note that we believe the second half revenue will be up significantly. I think it was 25% greater than the original forecast, or original guidance for the first half. So hopefully that helps you in terms of growth going forward.

And then on the repeat versus new in the first quarter, the repeat customers accounted for about 80% of the total gross bookings.

I mean, we look at that as a positive sign, but also an opportunity.

Correct.

I'm not sure that there's a right answer for the ratio between new customers and repeat customers. But there certainly is opportunity for us to grow the new customer base with the repeat customer numbers coming in pretty strongly.

Great. That's really helpful. And then our secondly and last one is: given Science 37's restructuring plan includes the addition of 115 employees in 2023 in those three regions of India, Pakistan, and Slovakia. But the expected elimination is 140 from Europe and US based positions. How do you plan to maintain productivity levels given this net reduction and as these employees -- as these new COEs ramp?

Yeah, we're not the first company to do this in regards to shifting to a center of excellence model. We did take the opportunity to take out some excess capacity when we actually executed this. And as we move forward into the COE model we're really taking advantage of near and offshore resources to execute the strategies that we may have done in the -- all in the US in the past.

So this gives us the flexibility to bring in additional resources at a significantly lower cost. And we've also made investments in leadership to be able to make that transition as strong as possible. Most notably the introduction of our new Head of Quality, Irina who is really exciting. She hit the ground running for us. And the technology leadership that we brought on to be able to ensure that we're executing this on scale as efficiently and as effectively as humanly possible.

Matt Hewitt, Craig-Hallum Capital Group.

Good morning. Thank you for taking the questions. Maybe first, the gross margin improvement that you spoke to, not only for this year, but for next year. I'm curious, is that all in the cost and efficiency side, or has there been some opportunities to take up pricing in some areas?

I mean, I'll start if you want to jump in, Mike. Certainly a significant expansion that we've been able to do from a pure cost standpoint. And so we made those actions to be able to execute that. But there is a topline opportunity for us as well. I think about a twofold.

One is in terms of growth revenue, growth of bookings. And we're starting to see that RFP volume going up, as I mentioned. So we expect that to be a nice knock-on effect. And we also expect revenues to increase based off of our ability to potentially accelerate some of our backlog with the introduction of our patient recruitment activities with Erica coming on board.

I'm not sure pricing has really been the area of focus for us. I think we've got competitive pricing in the marketplace today. And we made some of those adjustments in late 2022. And so don't expect to see a change there. But definitely there is a profit growth and a cost reduction component to it.

Yeah. I mean, I would just say I'd characterize in four forms. One, we took out excess capacity in this latest round of restructuring. So we get a margin bump up from that. Two, making investments on the technology front which we believe will yield additional improvements through the adjusted gross margin.

Three, as you think about some of the new hires that David referenced in terms of Erica and Irena, we believe that will streamline some of the existing processes that will provide some uplift on the margin. Then four, as David mentioned, we should get some benefits as we scale the business. And if you look at our guidance, that's effectively what we're implying here in terms of the back half of this year.

Got it. That's helpful. Thank you. And then maybe a second question. You're pretty much through some of the tough COVID related comps. Is there an opportunity do you think for you to show a growth in net reported bookings here in the second quarter? $25 million last year, I would think you'd be getting close, but what are your thoughts? Thank you.

I mean I think an overall growth -- I think that the arrows pointing up. And this is in a world where COVID is driving volume for us. So I think you maybe have noted in some of the prepared remarks that our revenue year over year is up 28%. If you strip out COVID, and so the underlying fundamentals, I think, are still there. And when we look at RFP growth, that's in a non-COVID world.

Frank Takkinen, Lake Street Capital Markets.

Hey, thanks for taking the questions. I was hoping I could ask one more on the cancellations side of the equation. Clearly a [polynomial] has occurred this quarter. But maybe just speak to how you're thinking about a normalized cancellation rate going forward? And specifically if there's any other projects that are on hold that could time out of the backlog in the next 12 months or so?

Sure. Good morning, Frank. Thanks for the question. I think what we've said historically is that, over time, we expect our cancellation rate to approach the industry norms of 15% to 20%. Obviously, at our current size, we're going to have some volatility. One project can make a positive or negative difference in a particular quarter.

And then I just would remind you that from a cancellation rate perspective, just to sort of underscore that volatility point, we had cancellation rates below 10% in 2021. And then about 38% in 2022. But longer term, we see a 15% to 20% rate is where we suspect will land.

In terms of the question regarding anything else in the backlog there, I think consistent with other companies in the industry, and this has been our practice since we've gotten here as well, we review the backlog each month in light of any recent changes in trends to the specific projects that sit in the backlog. And we adjust that, of course, from a risk perspective if and when those changes occur.

Okay, that's helpful. And then thinking about the cost cut implementations, I heard the comment partial recognition in Q2 and then we should see the full recognition of those cost cuts in the second half of this year. Can you speak to an adjusted SG&A quarterly rate that you expect to reach versus this quarter at $15.6 million after the cost cuts are implemented?

Yeah, I don't think we've given out the guidance on that. But what I would say is in that $8 million to $10 million of additional cost savings, that was a mix, both from the cost of revenues as well as SG&A. So our expectation, as I mentioned in the prepared remarks, is that we will have a sequential decline in SG&A over the remainder of 2023 from a dollar perspective.

And the reason we -- obviously we've gotten a partial impact this year is because we did the restructuring -- the majority of the restructuring here in the April timeframe, with the remainder to occur over the rest of Q2 of this year. The partial quarter versus the [other] quarter Q3, Q4.

Got it. Perfect. Thanks for the questions.

Thanks, Frank.

Thanks, Frank.

Charles Rhyee, TD Cowen.

Yeah, I just want a follow-up question. Mike, on the revenue guidance, I think last quarter, you said second -- think about second half coming in 25% higher than the first half. Given what we saw in the first quarter results, can you give us a sense how we should think about the cadence to the rest of the year?

Yeah, sure. Absolutely, right. And whenever we gave out our original guidance, we said second half would be up 25% versus first half. We also mentioned earlier in the prepared remarks that our first quarter revenues came in a bit better. And obviously, we're holding revenues in the same reaffirming where the revenue guidance was previously. So won't be quite as pronounced, but it'll still be pretty significant, as David mentioned, second quarter versus first quarter.

Okay. So it's just -- maybe just the slope of it's a little bit less, but still full year -- still second half higher than first half.

Yes, yes.

Okay. Perfect. Thanks.

Thanks, Charles.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to David Coman, CEO for closing remarks.

All right. I'd just like to say thanks, everybody, for joining us, and we'll talk to you in the next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.